paint industry report - spa sec - 15 june 2011 (1)

8/10/2019 Paint Industry Report - SPA Sec - 15 June 2011 (1)

1/36

Paints Industry Report

June 15, 2011

SPA Securities Ltd.


2/36

Executive Summary : 01 - 01

Industry Description : 02 - 05

Asian Paints : 07 - 12

Akzo Nobel : 14 - 19

Kansai Nerolac : 21 - 26

Berger Paints : 28 - 33

C o n t e n t s


3/36

Indian paint industry is in the sweet spot. Rising income

and aspiration levels of young demography along with

changing lifestyle has catapulted the demand for both

repainting and fresh paints. Despite slowdown in FY09, paint

industry reported robust double digit growth in last two years

on back of higher demand. Going ahead, we believe demand

scenario to remain strongbacked by higher discretionary

spend, increasing penetration, high construction activities

and robust growth in auto & consumer durables industries.

Paint industry has witnessed strong growth of 1.5-2x

GDP growth since l iberal izat ion. There has been

considerable reduction in average number of years required

for repainting from 10-11 years 5 years back to 4-5 years

now. This is the stark evidence of changing lifestyle with

rising income levels. Repainting the home is not just a

discretionary spend as it used to be as changing lifestyle

resulted in people aspiring for cleaner and beautiful looking

homes.

Robust construction activitieson back of higher housing

demand has further boosted the growth of paint industry.

The share of fresh paints in total demand has increased

significantly in last decade on back of increasing urbanization

and higher demand for housing. The fresh demand for paints

is expected to remain strong in many years to come.

Demand in rural areas witnessed strong upsurgew

rising income levels backed by increasing employme

opportunities and government focus on rural prosperity. High

growth in rural areas and tremendous scope of increasi

penetration strengthen our belief of sustainability of long ter

growth of the industry.

Industrial paint s egment also piggybacked the robu

growth in auto, consumer durables segment and high

infrastructural spend. Auto segment and consum

durables segment reported more than 20% growth in la

few years. We expect growth momentum in auto and durabl

segment to continue going forward. Higher infrastructu

spend targets by planning commission indicates strong bu

up of infrastructure. This would lead to sustainable long ter

demand for industrial paints.

At tr acted by st rong po tent ial,foreign players like Nippo

paints, Jotun paints, National Paints and Sherwin William

to name a few have set their bases in India to share t

growth pie of Indian paint industry. However, to gain a

significant presence in the industry would require stro

distribution network and brand recognition which act as

strong entry barrier for new players.

On back of aforementioned reasons, we believe Indian pa

industry to benefit significantly from high domest

consumption demand. We therefore have positive outlo

for the sector. Our top picks in the sector areAk zo Nob

and Berger Paints.

Company CMP Reco. Revenues (INR mn) EBIDTA Margins adj. EPS (INR) P/E (x) EV/EBIDTA (x)

(INR) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13

As ian Paint s 3,070 Hold 92,073.3 108,827.0 16.7% 17.2% 104.8 126.7 29.2 24.2 19.5 16.

Kansai Nerolac 875 Hold 25,753.2 30,470.2 13.2% 13.9% 38.8 46.3 22.4 18.8 14.0 11.

Berger Paints 103 Buy 28,051.5 33,381.2 10.5% 10.9% 5.1 6.4 19.8 15.9 12.5 9.

Akzo Nob el 907 Buy 13,456.8 15,928.3 12.7% 13.6% 53.4 61.5 17.0 14.8 13.3 10.

Companies under coverage

Executive Summary

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary

Sumit [email protected]. +91-22-4289 5600 Ext. 630

Paint Indust ry


4/36

Industry Description

Currently estimated at ~INR 210bn, Indian paint industry has

grown at a CAGR of ~18.5% in last two years and expected to

grow at a CAGR of ~17.5% in next four years to become INR396bn industry in FY15. Indian paint industry growth is closely

related with the GDP growth rate and has grown on an average

1.5-2x GDP growth rate since liberalization.

Industry Size (INR Bn)

Source: Industry, SPA Research

Industry vs GDP Growth

0%

5%

10%

15%

20%

25%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12EFY13E

Indus try Grow th GDP Grow th

Source: SPA Research

Industry StructureOrganized vs Unorganized

Indian paint industry is dominated by organized sector which

currently captures ~67% market share. Organized sector has

grown at a higher rate vis--vis unorganized sector in last few

years. Unorganized sector mostly offers lower end products

like low end enamels, distempers, lime wash, cement paint

etc. Rising disposable income and created awareness from

marketing efforts by organized players resulted in consumers

preferring for better quality and higher end products like

emulsions.

Decorative vs. Industr ial

Indian paint industry can be classified into decorative an

industrial paints with the market share in the ratio 80:20.

Decorative Paints (INR ~170bn)

General product wise paint classif ication:

Premier decorative paints are water based acrylic emulsio

used mostly in metros and other large cities and high end offic

The medium range consists of solvent based enamels whi

are popular in smaller cities and towns

Distempers are economy products demanded in the sem

urban and rural markets. This segment is dominated

unorganized sector. Margins of distemper lie betwee

emulsions and enamels.

In decorative paints segment solvent based paints (ename

has a larger share of ~33% but there is a significant change

trend towards adopting premium water based paints (emulsion

which are growing at much faster rates of ~20% in volum

terms in last 4-5 years. In emulsions, exterior emulsions a

growing faster than interior emulsions.

Decorative Paints Breakup (%)

33%

15%

6%

4%

4%

13%

14%

12%

Enamels

Interior Emulsions

Exterior Emulsions

Distemper

Cement Paint

Wood Finishes

Putty

Primers, Thinners etc

Source: AC Neilson, SPA Research

Traditionally repainting has dominated the demand for decorati

paints but higher construction activities on back of demand fhousing space has resulted in higher growth for new paintin

demand. Share of fresh demand for paints has increased

~30% currently from ~15% a decade ago.

Region-wise classification:

Region-wise, West region market accounts for 32% of pa

industry revenues followed by South (28%), North (26%) an

East (14%) in order (Chart). Rural regions and smaller tow

contribute 40% of the paint industry sales. Growth in Tier

and Tier III cities is higher than the growth in urban marke

due to higher construction activities and increasing rural incom

120

137

148

170

208

396

0

50

100

150

200

250

300

350

400

450

FY07 FY08 FY09 FY10 FY11 FY15

(INR

Bn)

CAGR=

14.7%

CAGR

=17.5%

Paint Indust ry

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergePaints

ExecutiveSummary


5/36

Regional Market Breakup

32%

14%

28%

26%

West South North East


Tinting systems a trend now:Color dispensing machine also

known as dealer tinting system (DTS), both computerized and

manual, have transformed the business, particularly on the

manufacturing and distribution sides. Earlier, paint companies

were required to manufacture all the shades in all the packs

(five to eight packs). A tinting machine helps mix small color

tubes with a white base paint to create a new shade instead of

keeping 3000+ SKUs which is challenge to even paint

companies. The machines altered the production pattern from

shades to producing bases thus providing economies of scale,

reduced inventory levels and eliminated redundancy of stocks.

It has cut down the new products introduction cycle

considerably. This has helped expand the range of shades for

each product category, offering a choice of shades to consumers

in the hundreds. For the retailers also, it eliminated the salesloss for want of range/desired shade. The machines have

brought a total change in the way business is transacted and

revolutionized business processes as well.

DTS a trend

1750012500

80004000

2000

3000

2500

9500

0

5000

10000

15000

20000

25000

30000

Asian Paints Berger Paints Kansai

Nerolac

Akzo Nobel

Dealers w ith DTS Dealers w ithout DTS

Source: Company, SPA Research

Industrial Paints (INR ~40bn)Market share of industrial paints in India of ~20% is low

compared to some developed countries where it is ~50%.

Industrial paints segment mostly offers products like automotive

coatings (35%), powder coatings (10%), and protective coatings

& general industrial coatings (32%).

Industry Breakup

80% 20%

32%

35%

10%

23%

Decorative Paints Automotive Paints

Protective Coatings & GI Powder Coatings

Others (Marine, packaging etc)


The industrial paints segment has grown at a fast pace of mo

than 15% in last 4-5 years on back of boom in auto an

consumer durables demand along with rising industrial spen

OpportunityThe economic growth in India has lead to higher disposab

income, increasing urbanization, easy availability of credit a

a concurrent growth in construction, automobiles and consum

durables segment which have emerged as the driving for

behind the rise in current consumption of paints. Industry h

experienced dynamic changes in the last decade in terms

changing environment and structure which propelled it to a hi

growth trajectory. However, India per capita consumption

paints is still abysmally low at 1.5Kg/annum compared to wo

average of 15Kg and 25Kg for US. It is even lower than SLanka with per capita consumption of 3.5/Kg. This howev

indicates tremendous opportunity for paint industry which

currently highly under-penetrated.

Per Capita Consumtion (Kg)

1.52.5 3.5 5.0

12.015.0

19.0 21.025.8

38.0

51.

0

10

20

30

40

50

60

India

China

Sri

Lan

ka

Ma

lays

ia

Japan

France

Swe

den

Germany

US

Singapore

Qa

tar

(kgs)

Source: Colourworlds, SPA Research

Demand for repainting:With change in lifestyle on back

rising income levels, there has been considerable increase

discretionary spend. Also, to keep up with status in the socie

people aspire for cleaner and better looking homes. There

always a need for repainting during marriage, home shiftin

festivals and various other occasions. Repainting dema

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary


6/36

therefore has been transforming from more of a discretionary

spend to somewhat need based spend. Significant up-trading

trend is visible in Tier II and Tier III cities with the shift from

lower and economy products like distempers and enamels to

high end emulsion paints. Increase in rural income is further

supporting the sustainability of paint industry growth rate.

Rising Income Level

71.1% 64.6%

17.4%18.6%

11.6% 16.8%

0%

20%

40%

60%

80%

100%

Year 2009 Year 2014E

High Income (> INR

200000)

Middle Income (INR

100000-200000)

Low Income (


7/36

TiO2 Dupont India Prices (INR per Kg)

100

120

140

160

180

200

220

210508 210509 210510 210511

Source: Bloomberg, SPA Research

Brent Crude ($/barrel)

0

20

40

60

80

100

120140

160

10/4/2007 10/4/2008 10/4/2009 10/4/2010


To mitigate the rising cost of raw materials and to protect

margins, paint companies hiked prices of their products by 8-12% but they were not sufficient to prevent erosion of EBIDTA

margins. However, prices are expected to stay stable and partly

cool off with addition of new capacities resulting better supply

of key raw materials in FY13.

Increasing Competition

Entry of new players: Distribution network a stron

deterrent

Attracted by huge market opportunities many foreign playe

like Sherwin Williams (USA), Nippon paints (Japan), NationPaints (Dubai) and Jotun paints (Europe) are planning to expa

in India by setting up/expanding their own manufacturi

facilities or by acquiring small paint companies. Stron

distribution network is a major deterrent for new entrants. Als

among top paint companies in world, some like Akzo a

Kansai are already present in India and rest have either technic

collaboration or a joint venture with their Indian counterpart

Threat from imports and unorganized sector is low

Despite fall in import duty on paints from 40% to 10% in la

decade, imports have not been a threat to Indian pa

companies. Indian climatic conditions are not conducive f

foreign formulations and modification cost in product formulati

is quite high.

Unorganized Sector: To mitigate the competition fro

unorganized sector many paint companies outsource t

manufacturing of low cost products like enamels, distempe

primers etc.

Also, installation of DTS and offering of other value adde

services like colour consultancy, home painting services a

colour experience in exclusive stores strengthen the grip

the paint companies.

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary


8/36

This page has been intentionally left blank


9/36

Asian Paints

CMP: INR 3,070 Recommendation: HOLD Target: INR 3,168

Dominance to stayDespite increasing competition from domestic and major foreign

paint companies, Asian Paint has maintained its market

leadership and has increased its market share from ~48% in

FY04 to ~54% in FY11. We expect it to maintain its dominance

going forward with further increase in market share backed by

higher sales growth.

Maximum beneficiary of h igh GDP growth rateAsian Paints is having larger presence in South and West

markets which contribute ~60% to overall paint industry sales.Company also has strong presence in fast growing rural

markets which contributes ~45% to its overall revenue. We

expect company to report revenue growth at a 2 year CAGR of

19.9% to INR 90,921.2mn in FY13 in its standalone business

backed by strong volume growth.

High competitive advantage and positioningAsian Paints offers products across all the categories in terms

of types of products and customer segmentation. Emulsion

which is the fastest growing category at ~20% volume growth

contributes ~50% of Asian paints decorative paint segment.

Unmatched dealers network of ~27,000 dealers give Asian

paints high competitive advantage. With initiatives like Signaturestores, Colour Ideas, home painting solutions, company is

focusing on increasing services along with product offerings.

Company's ad spends (~INR 2931mn) are highest among its

peers giving it stronger brand recall and occupy larger mind

share.

June 15, 2011

International and Industrial business to gain tractio

Industrial Segment:Asian Paints has signed a second equ

JV agreement with PPG Industries Inc for Non Decorative a

Non- Auto Paints in Jan 2011. The arrangement is subject

regulatory approval and is expected to be completed duri

H2FY12. We expect industrial segment business to perfo

well on back of robust demand of automotives, consum

durables and higher infrastructure investments.

International business: International business division report

a meager 1.9% growth in FY11 revenues on the back slowdown in international economies and disruptions

operations in MENA region which contributes more than 50

to international business division. Going ahead, wi

improvement in international economic environment and bet

operational efficiencies, we expect international business

grow at a 2 year CAGR of 10.2%.

ValuationsAsian paints having dominant position in paint industry is w

poised to take maximum benefit of high GDP growth rate. W

changing lifestyle needs, high disposable income and boom

construction activities, we expect Asian paints to grow at

revenue CAGR of 18.8% in the next two years. Based on hi

RoNW, higher EBIDTA margins and strong growth rate, we val

the stock at 25x FY13E EPS of INR 126.7 which implies

target price of INR 3,168. We therefore, initiate the covera

with a Holdrating.

Asian Paints, largest decorat ive paint company in India has a dominant market share of more tha

50% in organized sector. The company has presence in 17 counties wi th 22 manufacturing facilitieIt is one of the fastest growing FMCG companies wi th 4 year revenue CAGR of 20.4%. .

Shareholding (%) Dec-10 Mar-11

Promoters 52.33 52.34

FIIs 14.61 14.45

DIIS 11.38 11.56

Others 21.67 21.66

Key Data

BSE Code 500820

NSE Code ASIANPAINT

Bloomberg Code APNT IN

Reuters Code ASPN.BO

Shares Outstanding (mn) 95.9

Face Value 10

Mcap (INR bn) 294.5

52 Week H/L 3,230/2,283

2W Avg. Qty, BSE 33,512

Sensex 18,132.2

Y/E Mar (INR mn) FY09 FY10 FY11 FY12E FY13E

Net Sales 54,639.0 66,809.4 77,062.4 92,073.3 108,827.0

Growth (%) 24.0% 22.3% 15.3% 19.5% 18.2%

EBIDTAM (%) 12.3% 18.4% 17.0% 16.7% 17.2%

Adj. PAT 3,942.4 8,292.9 8,432.4 10,052.9 12,156.7

Growth (%) -4.1% 110.4% 1.7% 19.2% 20.9%

Adj. PATM (%) 7.2% 12.4% 10.9% 10.9% 11.2%

Adj. EPS (INR) 41.1 86.5 87.9 104.8 126.7

DPS 17.5 27.0 32.0 40.0 45.0

Dividend Yield (%) 0.6% 0.9% 1.0% 1.3% 1.5%

P/E (x) 74.7 35.5 34.9 29.3 24.2

P/BV (x) 24.5 17.2 13.5 10.7 8.5

EV/EBIDTA 44.6 24.3 22.8 19.5 16.0

Net Debt/Equity 0.1 0.1 0.0 0.1 0.0

RoACE (%) 31.8% 52.3% 41.1% 39.4% 38.4%

RoANW (%) 36.1% 56.9% 43.3% 40.8% 39.2%

Relative share price performance

80

90

100

110

120

130

140

150

Jun

10

Jul10

Aug

10

Sep

10

Oct10

Nov

10

Dec

10

Jan

11

Feb

11

Mar11

Apr11

May

11

AsianP ai nts Sens ex

Paint Indust ry

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary



10/36

Investment Rationale

1) Dominance to stay

Despite increasing competition from domestic and major

foreign paint companies, Asian paint has maintained its

market leadership and increased its market share anddominance at the expense of other domestic players and

unorganized sector.Organized sector has been growing

faster vis--vis unorganized sector indicating increasing

penetration by organized sector and consumer preference

for better products with the rise in income levels.Based on

our analysis on a set of companies in organized sector with

market share of more than 5%, Asian Paints has been

consistently increasing its overall share in the total

cumulative revenue. The share of Asian Paints has increased

from ~48 % in FY04 to ~54% in FY11.

Gaining Market Share

48

.3%

46

.3%

46

.8%

47

.9%

50

.4% 5

4.3

%

54

.8%

54

.7%

54

.7%

54

.8%

42%

44%

46%

48%

50%

52%

54%

56%

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11FY12EFY13E


Because of strong brand recall, consumers preference for

Asian paints product has been higher.Dominant position in

the industry helps Asian Paints to be able to extract higher

margins from its dealers and is able to maintain lower debtor

days at ~26 days which is lower compared to ~40 days for

the industry.

2) Maximum beneficiary of high GDP growth rate

The growth prospects of paint industry are highly correlated

with the growth of the economy and it has been growing at

1.5-2x GDP growth rate post liberalization. Higher GDP

growth rate puts more money in the hands of consumers

increasing their discretionary spending.

Geographical presence:Geographical presence of Asian

paints gives it a strong hold and edge over competitors.

Asian Paints is having larger presence in south and west

markets which contribute ~60% to overall paint industry

sales. However, company is seeing higher growth from north

and west regions and increasing its presence by penetration

through dealer's network. Company also has strong presence

in fast growing rural markets which contributes ~45% to its

overall revenue. According to the management, growth in

rural markets is ~150-200bps higher than the growth in urban

markets due to higher construction activities and increasing

rural income.

Asian Paints standalone (Indian) business has grown a

2 year CAGR of 21.7%. We further expect it to repo

revenue growth at a 2 year CAGR of 19.9% to IN

90,921.2mn in FY13 backed by strong volume growth.

Standalone Business Trend

24.9%

20.0%

23.4%21.1%

18.8%

0

20000

40000

60000

80000

100000

FY09 FY10 FY11 FY12E FY13E

0%

5%

10%

15%

20%

25%

30%

Standalone Revenue (INR mn) Grow th (%)


Capacity addition: On back of higher demand Asian Pain

has planned to expand its capacity by ~0.3mn MT in ne

two years to ~0.89mn MT from current capacity of 0.59m

MT by setting up a greenfield plant for a capex of INR 10

in Khandala which is scalable to ~0.4mn MT. Total cap

is being funded through internal accruals. The plant

expected to be commissioned by FY13. Presently t

company is operating at higher capacity utilization of ~80%

Company commissioned a plant in Rohtak, Haryana

capacity ~0.15mn MT thereby increasing its capacity fro

~0.44mn MT in FY10 to ~0.59mn MT in FY11.

3) High competitive advantage and positioningProduct offerings:Asian Paints offers products across

the categories in terms of types of products and custom

segmentation.

Product Offerings Brands Price (INR/Litre)

(Min-Max)

Exterior Emulsion Apex, Duracast 150-290

Interior Emulsion Royale, Tractor 120-400

Enamel Apcolite, Utsav 150-190

Distempers Tractor, Utsav 45-95

Source: SPA Research *prices are in Mumbai region as on 8 May, 2011

Emulsion which is the fastest growing category at ~20volume growth contributes ~50% of Asian paints decorati

paint segment. The margins in emulsion paints are high

than the margins in distempers and enamels. The compa

has introduced lower priced interior emulsions in order

encourage users of distempers and enamels to upgra

themselves to emulsion paints.

Unmatched Dealers network: Unmatched deale

network give Asian paints high competitive advantag

Company expects to add 1,500-2,000 new dealers eve

year to its already enviable network of ~27,000 deale

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergePaints

ExecutiveSummary


11/36

Out of total dealers network ~17,500 dealers have Asian

Paints dealer tinting system installed known as Colour World

which enables the company to cut inventory, packaging

and space cost helping it aid margins. Dealers have to fork

out INR 0.2mn for installation of machine in their shop. In

this way, Asian Paint is able to strengthen its hold over its

dealership network further reducing any threats from

competitors.

Initiatives: With initiatives like Signature stores and

converting already existing dealers shop into similar model

as signature stores (known as Colour Ideas, 16 till now),

company is focusing on increasing services along with

product offerings. Through these stores company offers

colour consultancy, demonstration of colour application,

varied themes to decorate home and provides technical

assistance in choosing right colour suiting the home and

surroundings. It also offers home painting services in 13cities at a fixed cost per square feet for a particular paint

type. Encouraged by the customer response for its signature

store, company is shortly opening another store in

Connaught Place, New Delhi. We believe that this strategy

to offer better value to customers would increase the

stickiness and loyalty for the company's product along with

brand enhancement.

Higher Ad Spends:Company's ad spends are highest

among its peers giving it stronger brand recall and occupy

larger mind share. Paint demand comes mostly from

customer pull rather than distributor push. Therefore, a strong

brand positioning is critical for higher sales in the industry.

Ad & Publ ic ity Exp. in FY10 (INR mn)

865.0 770.2 679.62,442.5

9.2%

4.4%4.6%

4.0%

0

500

1000

1500

2000

2500

3000

Asian Paints Akzo Nobel Berger Paints Kansai

Nerolac

0%

2%

4%

6%

8%

10%

Ad & Publicity Exp. in FY10 (INR mn)as a % of Net Sales

4) International and Industrial business to gain traction

Industrial Segment:Asian PPG Industries (APPG), a

50:50 JV of Asian Paints with PPG Industries (USA), is the

second-largest player in the automotive OEM paint segment

with a market share of ~24%. APPG is one of the largest

suppliers of paints to Hyundai Motor India, General Motors

India and it is the sole supplier to New Holland Tractors

India. Asian PPG is also the leading supplier of acrylic CED

coating to leading two-wheeler companies: Hero Hond

Motors Ltd., TVS Motor Company, and Bajaj Auto Ltd. W

the acquisition of the advanced refinish 2K business fro

ICI India in March, 2007, Asian PPG became the leader

the refinish segment.

Asian Paints has also signed a second 50:50 JV agreemewith PPG Industries Inc for Non Decorative and Non- Au

Paints in Jan 2011. Industrial businesses of both Asi

Paints and PPG will be part of this second JV. Asian Pain

is to take lead in the second venture and PPG to take t

lead in APPG in order to utilize their respective strengths

best capture the growth in infrastructure development a

globally driven markets in India. The arrangement is subje

to regulatory approval and is expected to be complet

during H2FY12.

APPG and Industrial paint segment (APICL) of Asian Pai

contributed 4.8% (INR 3.7bn) to consolidated revenue

growing by 23.7% in FY11. We further expect thmomentum in sales growth to sustain on back of robu

demand of automotives, consumer durables and high

infrastructure investments.

Revenue Trend: APPG* + APICL (INR mn)

30.1%

-1.4%

18.6%

23.7%

0500

1000

1500

2000

2500

3000

3500

4000

FY08 FY09 FY10 FY11

-5%0%

5%

10%

15%

20%

25%

30%

35%

Revenue from APPG* + APICL Grow th (%)


International business:International business division report

a meager 1.9% growth in revenues of INR 9.9bn and contribut

12.8% in FY11 consolidated sales. The lower revenue grow

was on the back of slowdown in international economies a

disruptions in operations in MENA region which contribut

more than 50% to international business division.

Value Sales (INR mn) FY10 FY11 YoY (%Caribbean 1,612.0 1,568.0 -2.7%

Middle East 5,361.0 5,159.0 -3.8%

South Asia 2,008.0 2,403.0 19.7%

South Pacific 719.0 750.0 4.3%

Total 9,700.0 9,880.0 1.9%


The company has presence in 16 other countries except Ind

along with 13 manufacturing facilities. It is the largest pa

company in Caribbean region, top 3 in South Pacific Islan

and South Asian regions. Also the company is third largest

the Middle East with ~15% market share in Egypt.

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary


12/36

Company has exited loss making unit in Singapore in FY11 in

its international business portfolio. Going ahead, with

improvement in international economic environment and better

operational efficiencies, we expect international business to show

improved performance and grow at a two year CAGR of 10.2%.

Investment Concerns

1) Raw material cost inflation:Raw material (RM) which

accounts for ~60% of Net Sales witnessed strong inflation

of 13.9% in FY11 on back of rising prices of key raw material

like titanium-dioxide (which contributes 15-18% of RM cost)

and increasing prices of crude derivatives (contribution of

more than 20%).

RM breakup (FY10)

17%21%

15%11%

36%

Pigments, extenders, minerals etc

Additives

Oils & Solvents

Monomers & Resins

Others


Although company has affected cumulative price increases

of ~12%, they were not enough to protect the margins.

Company's gross margins declined from 43.8% in FY10 to41.9% in FY11. In light of sustained raw material cost

pressure, company increased the prices of its products by

cumulative ~6.8% till 1st June, 2011. Though this would

help cushion the margins, continuous price increases could

pose a threat to demand scenario. On back of higher RM

cost inflation, we expect company's gross margins to reduce

by 64bps in FY12 to 41.3%. However, we expect margins

to improve by 45bps in FY13 to 41.8% on back of expected

benign raw material cost inflation.

2) Slowdown in GDP growth rate:Since growth of paint

industry has a strong positive correlation with GDP growth

rate, any drastic fall in economic growth prospects couldpose a serious risk to our growth projections.

3) Increasing competition:Entry of new foreign players like

Nippon, Jotun, Sherwin Williams and National Paints; and

aggressive capacity addition by existing players indicates

increasing competitive intensity. However, Asian Paints has

been able to not only defend its market share but

continuously increasing it with aggressive market strategies

and by anticipating early the next growing trend in the

industry (for e.g. company realized the potential for emulsion

paints much before its peers).

Financial Overview

1) Revenue and Profit growth:FY10 contains 15 mon

consolidation of international subsidiaries to bring in lin

with standalone reporting. On like to like basis revenue

grew by 19.5% in FY11. On the back of robust demanscenario due to higher GDP growth rate and Asian pain

strong positioning in the industry, we expect its topline

record a sales of INR 108.8bn in FY13 at 2 year CAGR

18.8%. We expect PAT to grow at a 2 year CAGR of 20.1

to INR 12.2bn in FY13.

Net Sales Trend

24.0%22.3%

18.2%

15.3%

19.5%

0

20000

40000

60000

80000

100000

120000


0%

5%

10%

15%

20%

25%

30%

Net Sales (Consol, INR mn) Growth (RHS)

APAT Trend

110.4%

20.9%19.2%1.7%

-4.1%

0

2000

4000

6000

8000

10000

12000

14000


-20%

0%

20%

40%

60%

80%

100%

120%

APAT (Consol; INR mn) Growth (RHS)

2) Due to continuous pressure from raw material cost an

un-equivalent price increases, we expect company's gros

margins to fall resulting in the erosion in EBIDTA and PA

margins in FY12. We expect Asian paints margins reduce by 36bps to 16.7% in FY12. However, we expe

EBIDTA margins to rise to 17.2% on back of expecte

lower raw material cost inflation in FY13.

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergePaints

ExecutiveSummary


13/36

Margin Profile

38.3%43.8% 41.9% 41.3% 41.8%

12.3%

18.4% 17.0% 16.7% 17.2%

7.2%

12.4% 10.9% 10.9% 11.2%0%

10%

20%

30%

40%

50%


Gross Margins EBIDTA Margins APAT Margins

3) Going forward, we expect return on average capital

employed (RoACE) and return on average net-worth

(RoANW) to get in line with its long term average of above

35% after disproportionately high in FY10.Return Profile

39.4% 38.4%

56.9%

39.2%

41.1%

52.3%

31.8%

40.8%43.3%

36.1%

30%

35%

40%

45%

50%

55%

60%


RoACE RoANW

ValuationsAsian paints having dominant position in paint industry is w

poised to take maximum benefit of high GDP growth rate. W

changing lifestyle needs, high disposable income and boom

construction activities, we expect Asian paints to grow atrevenue CAGR of 18.8% in the next two years. Based on hig

RoNW, higher EBIDTA margins and strong growth rate, w

value the stock at 25x FY13E EPS of INR 126.7 which impli

a target price of INR 3,168. We therefore, initiate the coverag

with a Holdrating.

30

25

20

10

0

500

1000

1500

2000

2500

3000

3500

Apr-

06

Apr-

07

Apr-

08

Apr-

09

Apr-

10

Apr-

11


Company BriefAsian Paints is the largest decorative paint company in Ind

since last 4 decades and has a dominant market share

more than 50% in organized sector. The company has presen

in 17 counties with 22 manufacturing facilities. It is one of th

fastest growing FMCG companies with a 4 year CAGR

20.4%. It is also the third largest player in industrial pain

with a market share of ~ 13%. Chemical business whi

contributed 1% to consolidated revenue of FY11 consists

Phthalic Anhydride and Pentaerythritol, which are used in t

paint manufacturing process.

Revenue Breakup (FY11)

81%

1%

5%

13%

APL - Paints

Chemicals

APPG* + APICL

International

Decorative Manufacturing Facilities in India

Bhandup (Mumbai, Maharashtra)

Ankleshwar (Gujarat)

Patancheru (Andhra Pradesh)

Kasna (Uttar Pradesh)

Sriperumbudur (Chennai, Tamil Nadu)

Rohtak (Haryana) - Commissioned in April 2010

Kesurdi (Maharashtra) Will be ready by 2013


IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary


14/36


15/36



16/36

Akzo Nobel India

Plans to fill the product gap; bid to renew market shareAkzo Nobel India (formerly ICI India) is known for its strongbrand Dulux in premium market segment and ICI in economymarket segment. Due to lack of product offerings for mid-marketand lower-market segment, company has been continuouslylosing market share to competition. However, with the completerevamp of top management team in last two years, companyis expecting to aggressively launch new products in mid marketsegment to fill the product gaps and renew efforts to gain marketshare. We believe that company would record revenue CAGRof 20.5% in next two years on back of new product launchesand increased sales & marketing efforts.

EBIDTA margins to expandGoing ahead, we expect Akzo to benefit from higher operatingleverage on back of expanding revenue base. Therefore webelieve that company's EBIDTA margins to improve by 140bpsfrom 12.2% in FY11 to 13.6% in FY13. On the back ofimprovement in margins and higher revenue growth, we expect

Akzo's operating PAT to grow at a two year CAGR of 29.8% toINR 1244.0mn in FY13.

Strong balance sheet with investments of INR 10bnAs per FY2011 balance sheet, Akzo's cash and liquid

investments stood close to ~INR10.2bn transforming into INR275.6 per share (30% of market capitalisation). Going ahead,we expect the cash and liquid investments surplus to increaseto INR 10.8bn (INR 294.4 per share) in FY2013, despiteaccounting for a capex of INR 2.2bn over next two years, drivenby strong operating cash flows, high treasury income andimprovement in margins.

June 15, 2011

Refinish paint business to ride the growth of auownershipRefinish paint business which caters to refinish paint fautomotives contributes ~15% to Akzo's overall revenueCompany has enhanced its focus to cater this business segmeWith increasing ownership of automotives and tough rotravelling conditions, we expect good demand for refinish painTherefore, we expect the business to perform well going forwa

Renewed focus to growCompany is backed by the parent company Akzo NobNetherlands which has consistently ranked as world's largepaint company. Backed by the renewed efforts from parecompany with its bigger plans for Indian market, Akzo Nobmanagement has guided to become Euro 1bn entity by 201To achieve the target company is undergoing massive capacexpansion plans. It plans to double its capacity from curre~80,000 MT to ~160,000 MT by FY13.

ValuationsExpect re-rating of valuation multiple:At CMP of INR 91

Akzo is trading at a PEG of 0.6 compared to 1.2, 1.2 and 0.7 Asian Paints, Kansai Nerolac and Berger Paints respectiveWe expect company to trade atleast on a PEG of 0.85 (agrowth of 29.8% in next two years), which is 30% discount

market leader Asian Paints. We believe the valuations are justifion back of higher growth in revenue and profits, improved margiand return on networth, and lowest capital employed amongpeers. This implies 25.4x FY13 EPS of INR 33.8 translatiinto target price of INR 1,157 (25.4x FY13 core EPS + 30share from Investment surplus) giving an upside of 28%. Winitiate the coverage with BUY.

Akzo Nobel India (Akzo) known for its premium segment product Dulux has a market share of ~10%. Company's business can be broadly divided into decorative paints and refinish auto pain

where later contributes ~15% to its revenues. Erstwhile ICI, the companies name was changed tAkzo Nobel in FY10 after it was acquired by largest paint company in the world in 2008.



FIIs 1.17 1.24

DIIS 19.60 18.30

Others 22.83 23.98

Key Data

BSE Code 500710

NSE Code AKZOINDIA

Bloomberg Code AKZO IN

Reuters Code ICI.BO


Face Value 10

Mcap (INR bn) 33.4

52 Week H/L 970/616


Sensex 18,132.2


Net Sales 9,087.0 9,471.0 10,968.2 13,456.8 15,928.3

Growth (%) -3.6% 4.2% 15.8% 22.7% 18.4%

EBIDTAM (%) 12.9% 13.4% 12.2% 12.7% 13.6%

Adj. PAT 951.0 1,593.0 1,664.1 1,968.4 2,263.5

Growth (%) 20.5% 67.5% 4.5% 18.3% 15.0%

Operating PAT 611.0 692.3 737.9 968.6 1,244.0

Growth (%) 9.2% 13.3% 6.6% 31.3% 28.4%

Optng. PATM (%) 6.7% 7.3% 6.7% 7.2% 7.8%

Adj. EPS (INR) 25.0 43.2 45.2 53.4 61.5

Operational EPS 16.0 18.8 20.0 26.3 33.8

DPS 16.0 16.0 18.0 18.0 20.0

Dividend Yield (%) 1.8% 1.8% 2.0% 2.0% 2.2%

P/E (x) 36.3 21.0 20.1 17.0 14.8

P/BV (x) 3.6 3.4 3.1 2.8 2.5

EV/EBIDTA 21.8 18.8 17.5 13.2 10.5

Net Debt/Equity (1.0) (1.0) (0.9) (0.9) (0.8)

RoACE (%) 15.5% 15.7% 14.0% 16.9% 17.5%

RoANW (%) 11.0% 16.2% 16.0% 17.1% 17.7%


80

90

100

110

120

130

140

150

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Akzo Sensex

Paint Indust ry


IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary

CMP: INR 907 Recommendation: Buy Target: INR 1,157


17/36


1) Plans to fill the product gap: bid to renew market share

Akzo Nobel (formerly ICI) is known for its strong brand Dulux

in premium market segment and ICI in economy market

segment. Company has highest average realization per litreof ~INR 157 compared to INR 110, INR 105 and INR 85 for

Kansai Nerolac, Asian Paints and Berger respectively

(Chart).

Avg. Realization FY11 (INR/Lt)

80

105 110

157

0

20

40

60

80

100

120

140

160

180

Berger Asian Paints Kansai Akzo Nobel


Due to lack of product offerings for mid-market and lower-market

segment, company has been continuously losing market share

to competition. Akzo's market share fell to ~9% in FY11

compared to ~16% in FY04 (Chart).

Akzo Nobel (ICI) Market Share Trend

16.6% 16.3% 16.1%

14.0%12.8%

10.9%9.5% 9.1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11


However, with the complete revamp of top management team in

last two years, company is expecting to aggressively launch

new products in mid market segment to fill the product gaps

and renew efforts to gain market share. Company reported a

much improved YoY growth of 15.9% in FY11 after flattish growth

in FY08 to FY10.

Net Sales Trend

15.8%

22.7%18.4%

4.2%

-3.6%

4.7%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

FY08 FY09 FY10 FY11 FY12E FY13E

-5%

0%

5%

10

15

20

25

Net Sales (INR mn) Grow th (RHS)


We believe that company would maintain a CAGR of 20.5%

next two years on back of new product launches and increas

sales & marketing efforts.2) EBIDTA margins to expand

Akzo's gross margins is highest compared to its peers d

to its presence largely in premium paints. However, desp

this, Akzo's OPM has been ~600bps lower vis--vis As

Paints owing to significantly higher overheads, particula

A&P spends (~at 9% of revenue compared to ~3.5-4.

for its peers), due to lower revenue base.

Margins Comparison (FY11)

47.4%

12.2%

42.3%

18.1%

0%

10%

20%

30%

40%

50%

Gross Profit Margins EBIDTA Margins

Akzo Nobel As ian Paints


Going ahead, we expect Akzo to benefit from higher operat

leverage as overheads get spread over a larger revenue baTherefore we believe that company's EBIDTA margins to impro

by 140bps from 12.2% in FY11 to 13.6% in FY13.

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary


18/36

Margin Trend

43.9%49.0% 47.3% 46.8% 47.2%

12.9% 13.4% 12.2% 12.7% 13.6%

0%

10%

20%

30%

40%

50%

60%


Gross Margins EBIDTA Margins


On the back of improvement in margins and higher revenue

growth, we expect Akzo's operating PAT to grow at a two year

CAGR of 29.8% to INR 1244.0mn in FY13.

Operational PAT Trend

9.2%13.3%

31.3% 28.4%

-2.2%

6.6%

0

200

400

600

800

1000

1200

1400

FY08 FY09 FY10 FY11 FY12E FY13E

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Operational PAT Grow th (%)


3) Strong balance sheet with liquid investments of INR 10bn

Over the years, the company had divested several of its

businesses accumulating significant cash surplus on its

balance sheet. Hence, as per FY2011 balance sheet, Akzo's

cash and liquid investments stood close to ~INR10.2bn

transforming into INR 275.6 per share (30% of market

capitalisation). Going ahead, we expect the cash and liquid

investments surplus to increase to INR 10.8bn (INR 294.4

per share) in FY2013, despite accounting for a capex of INR2.2bn over next two years, driven by strong operating cash

flows, high treasury income and improvement in margins.

Investment & Cash Surplus/Share

205.4184.8

244.3264.6 275.6

299.9 294.4

0

50

100

150

200

250

300

350

FY07 FY08 FY09 FY10 FY11 FY12E FY13E


4) Refinish paint business to ride the growth of auto ownersh

Refinish paint business which caters to refinish paint f

automotives contributes ~15% to Akzo's overall revenue

Company has enhanced its focus to cater this busine

segment and is focusing to revamp the brand strategy f

'Eterna' with clear market segmentation. The busine

continued its focus on demand generation throug

programmes like "The Great Finishers Club", colo

workshops and training in colour matching skills for painte

Total Vehic les Ownersh ip (mn)

102.4125.2

168.4

372.2

0

50

100

150

200

250

300

350

400

2001 2003 2006 2013E


With increasing ownership of automotives and tough roa

travelling conditions, we expect good demand for refinish pain

Therefore, we expect the business to perform well going forwa

5) Renewed focus to grow

Renewed focus to grow:Company is backed by the pare

company Akzo Nobel, Netherlands which has consisten

ranked as world's largest paint company for many yea

and has strong global brands. Backed by the renew

efforts from parent company with its strong plans for Indi

market, Akzo Nobel management has guided to becom

Euro 1bn entity by 2015. Currently it's trading at MCap

2.9x Net Sales. Assuming it maintains the same MCap

Net Sales ratio in FY15, company needs to grow its reven

at a CAGR of ~20% for next four years.

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergePaints

ExecutiveSummary


19/36


20/36

Return prof ile

15.5% 15.7%

14.0%

16.9% 17.5%

16.2% 15.8%17.1% 17.7%

11.0%

0%

5%

10%

15%

20%


RoACE RoANW

Valuations

Expect re-rating of valuation multiple:At CMP of INR 910,

Akzo is trading at a PEG of 0.6 compared to 1.2, 1.2 and 0.7for Asian Paints, Kansai Nerolac and Berger Paints respectively.

We expect company to trade atleast on a PEG of 0.85 (avg

growth of 29.8% in next two years), which is 30% discount to

market leader Asian Paints. We believe the valuations are

justified on back of higher growth in revenue and profits,

improved margins and return on networth, and lowest capital

employed amongst peers. This implies 25.4x FY13 EPS of

INR 33.8 translating into target price of INR 1,157 (25.4x FY13

core EPS + 300/share from Investment surplus) giving an upside

of 28%.We initiate the coverage with BUY.

Company Brief

Akzo Nobel known for its premium segment product Dul

has a market share of ~9-10%. Company's business can

divided into decorative paints and refinish auto paints in t

ratio of 85:15. Erstwhile ICI, the companies name was changto Akzo Nobel in FY10 after it was acquired by largest pa

company in the world in 2008. Akzo has three manufacturi

facilities in Hyderabad (AP), Thane (Maharashtra) and Moh

(Punjab). Company is planning to launch new products to cat

fast growing mid-market segment to regain its market shar

Companies CMP PAT Gr PAT Gr EPS (INR) EPS (INR) P/E (x) P/E (x) PEG (x

(INR) FY12E FY13E FY12 FY13 FY12 FY13

As ian Paint s 3,070 19.2% 20.9% 104.8 126.7 29.3 24.2 1.2

Kansai Nerolac 875 11.4% 19.4% 38.8 46.3 22.6 18.9 1.2

Berger Paints 103 21.4% 24.6% 5.1 6.4 20.2 16.1 0.7

Akzo Nob el 907 31.3% 28.4% 26.3 33.8 24.0 18.0 0.6


IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergePaints

ExecutiveSummary


21/36

Financials

Balance Sheetmn )

Y/E March (INR mn) FY09 FY10 FY11 FY12E FY13

Share Capital 381.0 368.0 368.0 368.0 368

Reserves and Surplus 9,330.0 9,553.0 10,548.2 11,740.9 13,142

Total Networth 9,711.0 9,921.0 10,916.5 12,108.9 13,510

Total Debt - - - -

Current Liabilities 2,019.0 2,236.0 2,744.9 3,509.7 3,807

Provisions 1,537.0 1,552.0 1,696.8 1,528.0 1,228

Deferred Tax Liability (Net) 58.0 21.0 41.0 64.6 92

Total L iabilities 13,325.0 13,730.0 15,399.2 17,211.3 18,639

Gross Block 3,255.0 3,495.0 3,725.0 4,425.0 5,385

Acc. Depreciation 1,924.0 2,114.0 2,330.6 2,575.1 2,869

Net Block 1,331.0 1,381.0 1,394.4 1,849.9 2,515

CWIP 16.0 23.0 169.1 300.0 240

Investments 9,152.0 9,602.0 9,849.9 10,900.4 10,696

- Cash 147.0 143.0 303.1 147.4 147

- Inventory 1,008.0 972.0 1,531.8 1,489.9 2,106

- Debtors 757.0 808.0 701.4 1,138.5 1,039

- Loans and Advances 914.0 801.0 1,449.5 1,385.0 1,893

Total Current Assets 2,826.0 2,724.0 3,985.8 4,161.0 5,187

Total Assets 13,325.0 13,730.0 15,399.2 17,211.3 18,639

Profit & Loss

Y/E March (INR mn) FY09 FY10 FY11 FY12E FY13E

Net Sales 9,087.0 9,471.0 10,968.2 13,456.8 15,928.3

Growth (%) -3.6% 4.2% 15.8% 22.7% 18.4%

Cost of Goods Sold 5,099.0 4,826.0 5,775.3 7,161.5 8,415.3

Gross Profit 3,988.0 4,645.0 5,192.9 6,295.2 7,513.0

Gross Profit Margin (%) 43.9% 49.0% 47.3% 46.8% 47.2%

Employee Cost 446.0 608.0 696.6 798.3 918.0

Other Operating Exp 2,384.0 2,776.0 3,165.8 3,800.2 4,442.5

EBIDTA 1,158.0 1,261.0 1,330.5 1,696.7 2,152.5

EBIDTA Margin (%) 12.9% 13.4% 12.2% 12.7% 13.6%

Dep./Amortization 213.0 212.0 216.6 244.5 294.3

EBIT 945.0 1,049.0 1,113.9 1,452.2 1,858.2

Interest Expense 29.0 11.0 7.6 17.2 15.3

Other Income 876.0 962.0 967.8 1,113.0 1,105.5

Exceptionals 1,995.0 - 112.8 - -

EBT 3,787.0 2,000.0 2,186.9 2,548.1 2,948.4

Tax Expenses 841.0 407.0 432.6 579.6 684.9

PAT 2,946.0 1,593.0 1,754.3 1,968.4 2,263.5

Adjustment to PAT (1,995.0) - (112.8) - -

APAT 951.0 1,593.0 1,641.5 1,968.4 2,263.5

Growth (%) 20.5% 67.5% 3.0% 19.9% 15.0%

APAT Margin (%) 10.5% 16.8% 15.0% 14.6% 14.2%

Operating PAT 611.0 692.3 737.9 968.6 1,244.0

Growth (%) 9.2% 13.3% 6.6% 31.3% 28.4%

Operating PAT Margin (%) 6.7% 7.3% 6.7% 7.2% 7.8%

Cash Flowmn )


EBT 1,792.0 2,000.0 2,186.9 2,548.1 2,948

Less: Other Incm/Excp 965.0 959.0 1,080.6 1,113.0 1,105

Add: Depreciation 213.0 212.0 216.6 244.5 294

Add: Interest Paid 29.0 11.0 7.6 17.2 15

Taxes Paid (858.0) (456.0) (412.6) (556.0) (657.

Change in WC (210.0) 160.0 (592.8) 434.0 (727.

Others 19.0 140.0 - -

CFO (a) 20.0 1,108.0 325.1 1,574.7 767

Capital Expenditure (297.0) (271.0) (376.1) (1,000.0) (1,200.

Asset Sales 2,272.0 (7.0) 112.8 -

Change in Investment 908.0 823.0 46.2 -

Others (54.0) 210.0 1,080.6 1,113.0 1,105

CFI (b) 2,829.0 755.0 863.5 113.0 (94.

Change in Equity (154.0) (696.0) - -

Debt Raised/(Repaid) - - - -

Dividend paid (inc. tax) (356.0) (710.0) (771.0) (775.7) (861.

Interest Paid (29.0) (11.0) (7.6) (17.2) (15.

CFF (c) (539.0) (1,417.0) (778.6) (792.9) (877.

Change in Cash (a+b+c) 2,310.0 446.0 410.0 894.9 (204.

Opening Cash 6,987.0 9,297.0 9,743.0 10,153.0 11,047

Closing Cash 9,297.0 9,743.0 10,153.0 11,047.9 10,843

Key Ratiomn)


Per Share Data (INR)

Reported EPS 77.0 42.6 47.6 53.4 61.5

Adj. EPS 25.0 43.2 45.2 53.4 61.5

Growth (%) 21.5% 73.1% 4.5% 18.3% 15.0%

Operational EPS 16.0 18.8 20.0 26.3 33.8

Growth (%) 9.2% 13.3% 6.6% 31.3% 28.4%

CEPS 305.8 490.0 510.6 600.8 694.4

DPS 16.0 16.0 18.0 18.0 20.0

BVPS 255.1 269.3 296.4 328.7 366.8

Return Ratios (%)

RoACE 15.5% 15.7% 14.0% 16.9% 17.5%

RoANW 11.0% 16.2% 16.0% 17.1% 17.7%

RoIC 38.6% 16.4% 17.7% 18.0% 18.7%

Liquidity Ratios

Net Debt/Equity (1.0) (1.0) (0.9) (0.9) (0.8)

Interest Coverage Ratio 32.6 95.4 146.6 84.4 121.4Current Ratio 0.8 0.7 0.9 0.8 1.0

Quick Ratio 0.3 0.3 0.2 0.3 0.2

Efficiency Ratios

Asset Turnover Ratio 0.7 0.7 0.7 0.8 0.8

Inventory Days 80.4 74.9 79.1 77.0 78.0

Debtor Days 36.5 30.4 25.3 25.2 25.2

Payable Days 167.5 160.9 157.4 159.4 158.7

Valuation Ratios

P/E (x) 36.3 21.0 20.1 17.0 14.8

P/BV (x) 3.6 3.4 3.1 2.8 2.5

MCap/Net Sales (x) 3.8 3.6 3.1 2.5 2.1

P/CEPS (x) 3.0 1.9 1.8 1.5 1.3

Dividend Yield (%) 1.8% 1.8% 2.0% 2.0% 2.2%

EV/Net Sales (x) 2.8 2.5 2.1 1.7 1.4

EV/EBIDTA (x) 21.8 18.8 17.5 13.2 10.5 Source: Company, SPA Research

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary


22/36



23/36

Kansai Nerolac Paints

Dominant player in Industrial Paint Segment

KNP is the dominant player in industrial paints segment with

market share of more than 40% and contributes ~50% to its

overall revenue. It is a leader in automotive paints and powder

coatings with a market share of ~60% and ~27% respectively.

KNP has a strong technological backup from its parent companyKansai (Japan) which is the largest paint company in Japan and

has been featured in top 10 paints companies in the world.

Growth momentum to moderate in FY12

KNP has registered robust revenue growth on the back of strong

demand for automotives, consumer durables and infrastructure

development. In line with expected slowdown in auto segment

and other industrial segments in the current year, we expect

KNP revenue growth to slow down to 20.3% in FY12 from 25.3%

in FY11 on back of lower volume growth.

Focus towards increasing decorative paints

contributionCompany has plans to increase sales in decorative segment

by launching aggressive nationwide campaign and increasing

distribution reach. KNP recently roped in Shahrukh Khan to

promote its product in decorative segment. Kansai has plans

to open 30 new exclusive Nerolac brand stores in South.

June 15, 2011

Increasing capaci ty on higher demananticipation

In order to fulfill higher demand for paints both in industrial a

decorative segments, company plans to add ~0.1mn MT

capacity to its current capacity of ~0.2mn MT/annum. In ord

to increase the capacity company is setting up a greenfieplant in Hosur (TN) at an estimated capex of ~INR 6bn. T

plant is expected to be fully commissioned by FY13.

ValuationsKansai Nerolac is expected to maintain its dominant share

industrial paints segment and benefit from strong growth

automotive and consumer durables industry. Also, wi

company's focus to increase contribution from decorative pa

segment will reduce RM cost pressure due to better ability

pass cost through price increases. We expect KNP to grow

revenue CAGR of 19.3% in the next two years. On back

long term growth in industrial segment and dominant positi

of KNP in industrial paints, we value the stock at 20x FY13

This works out to be a 1 year target price of INR 926 with a

upside of 6% from CMP of INR 875. We therefore, initiate t

coverage with a Holdrating.

Kansai Nerolac Paints (KNP), formerly known as Goodlass Nerolac became a wholly-owne

subsidiary of Kansai Paint Company (Japan) after it took over the entire stake of the company 1999 and changed its name in 2006. The company has presence in both decorative and industria

paints segment which contributes equally to its revenues. In India, it is third largest player

decorative segment and largest player in Industrial paints segment with a market share of ~14% an

~42% respectively. It has the dominant share in auto paint segment of ~60%.



FIIs 6.05 5.92

DIIS 5.07 4.97

Others 19.61 19.84

Key Data

BSE Code 500165

NSE Code KANSAINER

Bloomberg Code KNPL IN

Reuters Code KANE.BO


Face Value 10

Mcap (INR bn) 47.2

52 Week H/L 1,055/720


Sensex 18,132.2


Net Sales 13,756.3 17,074.1 21,398.8 25,753.2 30,519.8

Growth (%) 4.2% 24.1% 25.3% 20.3% 18.5%

EBIDTAM (%) 11.5% 15.5% 13.6% 13.2% 13.9%

Adj. PAT 954.3 1,621.2 1,853.0 2,090.0 2,504.3

Growth (%) -20.3% 69.9% 14.3% 12.8% 19.8%

Adj. PATM (%) 6.9% 9.5% 8.7% 8.1% 8.2%

Adj. EPS (INR) 17.7 30.1 34.4 38.8 46.5

DPS 6.0 7.5 10.0 10.0 12.0

Dividend Yield (%) 0.7% 0.9% 1.1% 1.1% 1.4%

P/E (x) 49.4 29.1 25.4 22.6 18.8

P/BV (x) 7.2 6.1 5.1 4.4 3.8

EV/EBIDTA 30.3 18.2 16.5 14.1 11.4

Net Debt/Equity (0.4) (0.4) (0.4) (0.2) (0.2)

RoACE (%) 13.5% 20.0% 20.0% 19.5% 20.2%

RoANW (%) 15.3% 22.7% 21.9% 21.1% 21.8%


80

90

100

110

120

130

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

KNP Sensex

Paint Indust ry


IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary

CMP: INR 875 Recommendation: HOLD Target: INR 926


24/36


1) Dominant player in Industrial Paint Segment

KNP is the dominant player in industrial paints segment

with market share of more than 40% and contributes ~50%

to its overall revenue. It caters mainly to automotive(automotive coatings) and consumer durables (powder

coatings) industry and also has presence in general

industrial coatings and high performance coatings.

Industrial paints market share

16%

13%

24%

42%

5%

Kansai Nerolac

Berger Paints

Asian Paints

Shalimar Paints

Others


It is a leader in automotive paints and powder coatings with

a market share of ~60% and ~27% respectively. The list of

clients in automotive segment includes major auto players

like Maruti Suzuki, Toyota, Tata Motors, Mahindra and

Mahindra, Hero Honda and Bajaj Auto to name a few.

Auto Paints Market Share

65% 35%

9%

7%

24%

60%

Other Industrial Paints Kansai Nerolac

Asian Paints Berger

Others


Backup of strong parent:KNP has a strong technological

backup from its parent company Kansai (Japan), the largest

paint company in Japan and has featured in top 10 paint

companies in the world since many years. It provides

automotive paints to major global auto companies in the likes

of Suzuki, Toyota and Honda. Automotive segment contributed

~45% to its overall FY09 sales of USD 2.5bn.

Segmentwise Revenue Breakup - Kansai Japan (FY09

22%

45%

7%

9%

17%

Automotive Coatings

Industrial Coatings

Decorative Coatings

Marine and Protective Coatings

Others


KNP has a strong technological backup from its parecompany Kansai (Japan), the largest paint company Japan and has featured in top 10 paint companies in thworld since many years. It provides automotive paints major global auto companies in the likes of Suzuki, Toyo

and Honda. Automotive segment contributed ~45% to ioverall FY09 sales of USD 2.5bn.

2) Growth momentum to moderate in FY12KNP has registered robust revenue growth on the back strong demand for automotives, consumer durables aninfrastructure development. Automotive segment hawitnessed a robust 2 year CAGR of 29.2% and 22.5% inwheeler segments and passenger cars respectively (CharConsumer durables industry has also grown at a CAGR 22.7% in last 2 years (Source: CSO).

Passenger Cars Sales

20.5%

13.5%

19.1%

6.1%

15.6%

6.9%

20.1%

25.0%

0

50000

100000

150000

200000250000

300000


0%

5%

10%

15%

20%25%

30%

Passenger Cars Volume Growth (RHS)


2 Wheeler Sales

33.4%

16.1%18.2%

-1.2%3.0% 2.5%

40.6%

18.7%

0

200000

400000

600000

800000

1000000

1200000

1400000


-10%

0%

10%

20%

30%

40%

50%

2 Wheeler Volumes Grow th (RHS)


IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergePaints

ExecutiveSummary


25/36

Based on estimates of SIAM, four wheeler segment is

expected to grow at ~16% and 2 Wheeler segment at ~12%

in volume terms in FY12 after reporting more than 20%

volume CAGR in last two years. In line with expected

slowdown in auto segment and other industrial segments

in the current year, we expect KNP revenue growth to slowdown to 20.3% in FY12 from 25.3% in FY11 on back of

lower volume growth. Further we expect volume growth to

pick up in FY13 but lower value growth component to result

revenue to grow at 18.5% in FY13 to INR 30,519.8mn.

Net Sales Trend

4.2%

24.1% 25.3%

20.3%18.3%

0

500010000

15000

20000

25000

30000

35000


0%

5%

10%

15%

20%

25%

30%



3) Focus towards increas ing Decorat i ve Pa in ts

contribution

KNP has a market share of ~14% in decorative paints

segment and contributes another 50% to its overall revenue.

KNP offers products across all categories through some

renowned brands like Nerolac Impressions, Pearls, Beauty,

Suraksha and Excel (Chart).

Product Category Brands

Interior Emulsions Impression, Beauty

Exterior Emulsion Suraksha, Excel

Enamels Impressions, Satin, Synthetic

Distempers Beauty, Pearls


In decorative paint segment, emulsions contribute around 32%,

Enamels 25% and distemper 12%. Remaining is contributed

by primers, putty, fillers etc. Similar for the industry, emulsions

are growing at faster rate and have higher margins compared

to other paints.

Kansai (India) Revenue Breakup

50% 50%

31%

12%25%

32%

Industrial Paints Emulsions

Enamles Distempers

Others (primers, putty, fillers etc)


Decorative segment has short cycle of payment which reduc

working capital needs and ability to pass higher raw mate

cost inflation compared to industrial paints segment. Compa

was able to pass 80% of raw material cost increasesdecorative segment while passing the cost increase in indust

segment comes with a lag due to long term contracts w

institutions. Also, in industrial paints segment there is continuo

pressure from the companies to reduce cost of paints. Compa

has plans to increase sales in decorative segment by launch

aggressive nationwide campaign and increasing distribut

reach. KNP recently roped in Shahrukh Khan to promote

product in decorative segment.

Increasing reach: Traditionally it has higher presence in no

markets which contributes 26% to overall decorative pa

industry sales. Company however has aggressive plans

increase its presence in south markets and increase its sha

from decorative segment in its overall revenue. Kansai h

planned to open 30 new exclusive Nerolac brand stores in so

to increase awareness of products. It also setting up

manufacturing facility is Hosur, Tamil Nadu to improve

distribution reach in the south markets.

4) Increasing capacity on higher demand anticipation

KNP is the second largest player in India and has an ove

market share of ~18% in the paint industry. In order to fu

higher demand for paints both in industrial and decorat

segments, company plans to add ~0.1mn MT of capac

to its current capacity of ~0.2mn MT/annum. In order

increase the capacity company is setting up a greenfie

plant in Hosur (TN) at an estimated capex of ~INR 6bn. T

plant is expected to be fully commissioned by FY13.

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary


26/36

Capacity & Utilization

69.4% 69.0%78.4%

87.2% 84.8% 86.3%

0

50000

100000

150000

200000

250000

300000

350000

FY08 FY09 FY10 FY11 FY12 FY13

0%

20%

40%

60%

80%

100%

Capacity Utilization (RHS)


Investment Concerns

1) Rising raw material cost

KNP is at higher margin erosion risk compared to other

players in the industry in the environment of high raw material

cost inflation. Company has highest raw material as a %

net sales among the paint companies under our coverage.

Raw material as a % of sales (FY11)

52.7%57.7%

63.7% 65.4%

0%

10%20%

30%

40%

50%

60%

70%

Akzo Nobel Asian Paints Berger Kansai

Nerolac


RM breakup (FY10)

53%

6%

34%

7%

Pigments, Extenders and ResinsOrganic Acids and Anhydrides

Solvents, Oils and Fatty Acids

Others


Due to 50% contribution from industrial paints segment and

long term nature of contracts, company is not able to

immediately pass the raw material cost to its institutional

clients which affect its margins. In decorative paint

segment, company was able to pass 80% of cost inflatio

in FY11. Increase in cost of key raw material like titanium

dioxide and crude based derivatives by ~29% and ~40%

in FY11 resulted in gross profit margins falling by 267 bp

from 37.2% to 34.6%. Company however is intending t

take calibrated price hike in contracts in industrial segmen

2) Rising competition

With increasing competitive environment in the pain

industry, KNP like all other players is at risk of losing mark

share to other competitors.

Financial OverviewCompany's revenue has grown at a 2 year CAGR of 24.7% t

INR 21,398.8mn in FY11. Going forward, with expected slowdow

in automotive industry on back of rising fuel prices and intere

rate cost along with some slowdown in other industrial segmenwe expect company to witness a moderate growth in revenue

compared to last two years. We expect its revenue and pro

to grow at a 2 year CAGR of 19.4% and 16.3% in next tw

years to INR 30,519.8mn and INR 2,504.3mn respectively.

Net Sales Trend

4.2%

24.1% 25.3%

20.3%18.3%

0

5000

10000

15000

20000

25000

30000

35000


0%

5%

10%

15%

20%

25%

30%


S

APAT Trend

-20.0%

69.7%

15.4% 11.4%19.4%

0

500

1000

1500

2000

2500

3000


-40%

-20%

0%

20%

40%

60%

80%

APAT (INR mn) Grow th (RHS)

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergePaint

ExecutiveSummary


27/36

Due to continued pressure on raw material cost, we expect

company's EBIDTA margins to shrink by 38bps YoY in FY12,

cushioned partly by passing on raw material cost inflation but

regain 63bps in FY13 on back of expected improvement in

economic environment.

Margin Trend

KNP has been able to maintain good return profile of more

than 20% in last two years. We expect company to continue

to maintain more than 20% return on average networth

(RoANW) in next 2 years.









Return Profile

Valuations

Kansai Nerolac is expected to maintain its dominant share

industrial paints segment and benefit from strong growth

automotive and consumer durables industry. Also, w

company's focus to increase contribution from decorative pasegment will reduce RM cost pressure due to better ability

pass cost through price increases. We expect KNP to grow

revenue CAGR of 19.3% in the next two years. On back

long term growth in industrial segment and dominant positi

of KNP in industrial paints, we value the stock at 20x FY13

This works out to be a 1 year target price of INR 926 with a

upside of 6% from CMP of INR 875. We therefore, initiate t

coverage with a Holdrating.

IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary

13.5%

20.0% 20.0% 19.5% 20.1%15.4%

22.8% 22.2%21.1% 21.7%

5%

10%

15%

20%

25%


RoACE RoANW

34.6% 37.2% 34.6% 34.0% 34.4%

11.5%15.5%

13.6% 13.2% 13.9%

7.0%9.5% 8.8% 8.1% 8.2%

0%

5%

10%

15%

20%

25%

30%

35%

40%


Gross Margins EBIDTA Margins APAT

10

15

20

25

0

200

400

600

800

1000

1200

04Apr0 7 0 4Apr0 8 0 4Apr0 9 0 4Apr1 0 0 4Apr11


Company Brief

Kansai Nerolac Paints was formerly known as Goodla

Nerolac Paints. Goodlass Nerolac Paints became a who

owned subsidiary of Kansai Paint Company (Japan) after t

latter took over the entire stake of the company in 1999 a

changed its name in 2006. It has current shareholding of 70

in the company.

The company has presence in both decorative and industr

paints segment which contributes equally to its revenues.

India, it is third largest player in decorative segment and large

player in Industrial paints segment with a market share of ~14

and ~42% respectively. Company has overall market share

~18% in paint industry. It has five strategically-locat

manufacturing units in India and a strong dealer network

over 11,000 dealers across the country.


28/36

Financials

Balance Sheetmn )


Share Capital 269.5 269.5 538.9 538.9 538

Reserves and Surplus 6,275.0 7,458.7 8,622.8 10,082.3 11,830

Total Networth 6,544.5 7,728.2 9,161.7 10,621.2 12,368

Total Debt 936.3 1,099.8 824.8 953.6 959

Current Liabilities 2,442.3 3,043.2 3,635.4 4,357.4 5,136

Provisions 838.5 936.7 1,091.1 607.3 863

To tal Li abi li ties 10,761.6 12,808.0 14,713.0 16,539.5 19,327

Gross Block 5,419.8 6,376.7 7,021.4 9,671.4 11,821

Acc. Depreciation 3,033.6 3,473.5 3,967.1 4,582.3 5,374

Net Block 2,386.2 2,903.2 3,054.2 5,089.1 6,447

CWIP 309.4 97.0 763.6 241.8 295

Investments 2,944.3 4,015.4 3,718.2 2,865.6 2,731

- Cash 761.6 410.8 396.9 380.5 400

- Inventory 1,706.3 2,474.4 3,541.0 4,007.7 5,309

- Debtors 2,095.7 2,323.7 2,602.6 3,116.9 3,783

- Loans and Advances 417.1 410.9 502.3 665.7 111

Total Current Assets 4,980.8 5,619.9 7,042.8 8,170.9 9,605

Deferred Tax Asset (Net) 106.0 115.2 134.2 172.1 248

Total Assets 10,761.6 12,808.0 14,713.0 16,539.5 19,327

Profit & Lossn)


Net Sales 13,756.3 17,074.1 21,398.8 25,753.2 30,519.8

Growth (%) 4.2% 24.1% 25.3% 20.3% 18.5%

Cost of Goods Sold 8,995.8 10,718.2 14,002.5 16,984.6 20,031.9

Gross Profit 4,760.5 6,355.9 7,396.3 8,768.6 10,487.9

Gross Profit Margin (%) 34.6% 37.2% 34.6% 34.0% 34.4%

Employee Cost 733.0 750.5 916.4 1,107.4 1,312.4

Other Operating Exp. 2,442.0 2,958.3 3,563.4 4,249.5 4,941.1

EBIDTA 1,585.5 2,647.1 2,916.5 3,411.7 4,234.5

EBIDTA Margin (%) 11.5% 15.5% 13.6% 13.2% 13.9%

Dep./Amortization 376.1 442.6 493.6 615.1 792.0

EBIT 1,209.4 2,204.5 2,422.9 2,796.6 3,442.5

Interest Expense 18.4 12.0 8.4 10.5 8.3

Other Income 210.9 193.5 223.1 191.0 164.5

Exceptionals - - 253.7 - -

EBT 1,401.9 2,386.1 2,891.3 2,977.1 3,598.6

Tax Expenses 416.0 731.1 831.5 887.1 1,094.3

PAT 985.9 1,655.0 2,059.8 2,090.0 2,504.3

Adjustment to PAT (31.6) (33.7) (206.8) - -

APAT 954.3 1,621.2 1,853.0 2,090.0 2,504.3

Growth (%) -20.3% 69.9% 14.3% 12.8% 19.8%

APAT Margin (%) 6.9% 9.5% 8.7% 8.1% 8.2%

Key Ratio)


Per Share Data (INR)

Reported EPS 18.3 30.7 38.2 38.8 46.5Adj. EPS 17.7 30.1 34.4 38.8 46.5

Growth (%) -20.3% 69.9% 14.3% 12.8% 19.8%

CEPS 24.7 38.3 43.5 50.2 61.2

DPS 6.0 7.5 10.0 10.0 12.0

BVPS 121.4 143.4 170.0 197.1 229.5

Return Ratios (%)

RoACE 13.5% 20.0% 20.0% 19.5% 20.2%

RoANW 15.3% 22.7% 21.9% 21.1% 21.8%

RoIC 16.1% 24.8% 24.0% 22.8% 23.6%

Liquidity Ratios

Net Debt/Equity (0.4) (0.4) (0.4) (0.2) (0.2)

Interest Coverage Ratio 65.8 183.7 288.4 266.5 413.7

Current Ratio 1.5 1.4 1.5 1.6 1.6

Quick Ratio 0.9 0.7 0.6 0.7 0.7

Efficiency Ratios

Asset Turnover Ratio 1.4 1.4 1.6 1.6 1.7

Inventory Days 69.8 71.2 78.4 81.1 84.9

Debtor Days 56.1 47.2 42.0 40.6 41.3

Payable Days 83.8 93.4 87.0 85.9 86.5

Valuation Ratios

P/E (x) 49.4 29.1 25.4 22.6 18.8

P/BV (x) 7.2 6.1 5.1 4.4 3.8

MCap/Net Sales (x) 3.4 2.8 2.2 1.8 1.5

P/CEPS (x) 35.4 22.8 20.1 17.4 14.3

Dividend Yield (%) 0.7% 0.9% 1.1% 1.1% 1.4%

EV/Net Sales (x) 3.1 2.4 1.9 1.6 1.4

EV/EBIDTA (x) 30.3 18.2 16.5 14.1 11.4

Cash Flow)


EBT 1,401.9 2,386.1 2,891.3 2,977.1 3,598

Less: Other Inc./Excep. 210.9 193.5 476.8 191.0 164

Add: Depreciation 376.1 442.6 493.6 615.1 792

Add: Interest Paid 18.4 12.0 8.4 10.5 8

Taxes Paid (418.5) (770.3) (831.5) (887.1) (1,094.

Change in WC 861.3 (366.2) (907.0) (422.5) (635.

Others 17.8 (6.0) 11.5 -

CFO (a) 2,046.1 1,504.6 1,189.5 2,102.2 2,504

Capital Expenditure (747.0) (757.0) (1,243.9) (2,650.0) (2,150.

Asset Sales 0.3 0.1 21.3 -

Change in Investment (586.3) (1,029.2) 297.2 852.6 133

Others 155.4 157.2 476.8 191.0 164

CFI (b) (1,177.5) (1,628.9) (448.7) (1,606.4) (1,851.

Debt Raised/(Repaid) (43.3) 163.6 (275.0) 128.8 5

Dividend paid (inc. tax) (379.0) (378.0) (471.3) (630.5) (630.

Interest Paid (18.4) (12.0) (8.4) (10.5) (8.

CFF (c) (440.7) (226.5) (754.8) (512.2) (633.

Change in Cash (a+b+c) 427.9 (350.8) (13.9) (16.4) 19

Opening Cash 333.8 761.6 410.8 396.9 380

Closing Cash 761.6 410.8 396.9 380.5 400


IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergePaint

ExecutiveSummary


29/36



30/36

Berger Paints India

Margins expansion to boost profitsBerger is aggressively focusing towards premium emulsion paints

category and cost cutting measure in terms of raw material

procurement the effect of which would be visible from FY12

onwards. We therefore believe that standalone EBIDTA margins

to improve by 52bps in next two years to 10.9% on the back of

gross margins expansion. Company also plan to expand inSouth region where it has weaker presence. We expect Berger's

standalone net sales to grow at a 2 year CAGR of 20.0% to

30,274.7mn in FY13.

Subsidiaries to be EPS accretive going forwardOther businesses have grown at a 2 year CAGR of 41.6% in

revenue terms to INR 2319.0mn in FY11. After reporting loss

at PAT level in FY09, company has reported improvement in

its net profit to 17.8mn in FY11. Major portion of revenue comes

from Bolix (~7% of consolitated revenues). With expected

improvement in economic environment going forward, we expect

Bolix business to add to the growth of consolidated profits.

Industrial paints segment to benefit from high

industrial growthBerger is the leading player in protective coating for over 45

years. The segment contributes ~15% to its standalone

revenues and has a market share of more than 25%. This

June 15, 2011

segment is highly correlated with growth in industrial segmeand found its application in all types of industries. We expeindustrial division to report good growth going forward on baof high GDP growth rate and infrastructure spend.

Capacity addition plansIn a bid to increase its sales of emulsion paints, company

augmenting capacity by constructing a green-field water baspaints facility in Hindupur, AP with a capacity of 0.1mn Mannum (scalable to 0.15mn MT/annum), is expected commence operations by H1FY14. Apart from expansionHindupur, company is also augmenting its capacity in manufacturing facilities at Goa and Rishra in FY12. This wouresult in cumulative capacity of 0.43mn MT/annum by FYagainst 0.26mn MT/annum in FY11.

ValuationsBerger has been growing at a 2 year CAGR of 19.7% in reventerms. Going forward, we expect Berger to maintain the gogrowth momentum on the back of new product offerings premium segment and its expansion plans in south regio

Increased contribution from high end products along wbackward integration will help company to improve its overmargins resulting in higher profitability. We therefore initiathe coverage on the company with a BUYand a target price128 (20x FY13E EPS of 6.4), giving an upside of 24% from t

CMP of INR 103.

Berger Paints India (Berger) is the second largest decorative paint company in India. Company ha

an overall paint industry market share of ~17%. The company's decorative business is furtheclassified into retail and pro-links. In the latter, the company deals directly with major projects bot

in public and pr ivate sector. It has seven manufacturing facili ties spread across India and more tha

82 depots besides four overseas manufacturing facilities. Company has second highest distributio

network of ~14,500 dealers spread across the country



FIIs 7.08 7.43

DIIS 4.43 4.00

Others 12.89 12.98

Key Data

BSE Code 509480

NSE Code BERGEPAINT

Bloomberg Code BRGR IN

Reuters Code BRGR.BO


Face Value 2

Mcap (INR bn) 35.6

52 Week H/L 123.0/69.4

2W Avg. Qty, BSE (mn) 0.16

Sensex 18,132.2


Net Sales 16,281.1 18,958.1 23,327.2 28,051.5 33,381.2

Growth (%) 16.3% 16.4% 23.0% 20.3% 19.0%

EBIDTAM (%) 8.4% 10.8% 10.4% 10.5% 10.9%

Adj. PAT 792.0 1,202.5 1,466.1 1,779.9 2,217.9

Growth (%) -14.4% 51.8% 21.9% 21.4% 24.6%

Adj. PATM (%) 4.9% 6.3% 6.3% 6.3% 6.6%

Adj. EPS (INR) 2.5 3.5 4.2 5.1 6.4

DPS 0.6 1.1 1.3 1.5 1.7

Dividend Yield (%) 0.6% 1.1% 1.3% 1.5% 1.7%

P/E (x) 41.5 29.6 24.3 20.0 16.1

P/BV (x) 8.4 6.0 5.2 4.4 3.7

EV/EBIDTA 26.4 18.1 15.4 12.6 10.0

Net Debt/Equity 0.8 0.2 0.2 0.2 0.0

RoACE (%) 15.6% 16.3% 18.0% 18.8% 20.4%

RoANW (%) 24.6% 16.1% 18.7% 19.6% 20.2%


80

100

120

140

160

180

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Berger Sensex

Paint Indust ry


IndustryDescription

AsianPaints

AkzoNobel

KansaiNerolac

BergerPaints

ExecutiveSummary

CMP: INR 103 Recommendation: BUY Target: INR 128


31/36

Investment Rationale:

1) Margins expansion to boost profits

Berger is the second largest player in decorative paint

segment with an overall market share of ~17%. Berger is

known for its products offering in economy segment (Avgprice/lt is lowest compared to peers at ~INR 80 for FY11).

Product Category Brands

Interior Emulsions Silk, Breathe Easy, Rangoli, Illusions

Exterior Emulsion Weather Coat, Walmasta

Enamels Luxol, Butterfly, Jadoo

Distempers Bison, Jadoo


However, having realized potential and growth of emulsionpaints, company is now aggressively marketing its highermargin premium products (Silk, Breathe Easy, Weather Coatetc) through new product launches and higher advertisement

and promotional spend. Emulsion paints are the f

paint industry report - spa sec - 15 june 2011 (1)

Documents